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Easing Farmland Values No 'Doom-and-Gloom' Situation -- Survey

Jeff Caldwell 08/26/2014 @ 2:23pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

Just because the land market has leveled off from its meteoric rise of the last few years doesn't mean it will join forces with lower grain prices to drive grain farm profits completely into the ground, according to the results of a recent survey of farmland market experts and ag lenders in the Corn Belt.

Cash rents are likely to fall by around $33 per acre in Illinois, according to the 2014 Illinois Society of Professional Farm Managers and Rural Appraisers Mid-Year Survey, the results of which were released this week. Together with recent data from University of Illinois economists, this data, collected from farmers, investors, and other farmland buyers, represents a sign that the capitalized value of farmland will head lower, but not by too much, says Dale Aupperle, Heartland Ag Group, LTD., in Forsyth, Illinois, and co-chair of the Illinois Land Values and Lease Trends Report. That's based mostly on the idea that corn prices will hover around the $3.75-per-bushel level for the 2014 crop year, the price level the majority of those responding to Aupperle's survey say they expect through the end of the year.

"This translates into lower returns on a per-acre basis and makes it more difficult to justify higher prices being paid for the land. Couple that with an expectation of interest rates to possibly rise over the next year, higher inputs costs, and the potential for very high costs for propane this winter, and there has been a dampening of attitude," according to Aupperle. "When you look at what is causing this softening of prices, there are a number of factors that come into play. The most dramatic is the drop we’ve seen in commodity prices."

The Illinois survey shows almost two-thirds of those responding say that if corn prices fall below the $3.50 mark, the land market will follow suit, and 5% of those responding say that downturn could be "like that which occurred during the 1980s," Aupperle says. Still, most believe such a downturn would cause a "modest, negative impact" on farmland prices.

What about interest rates? On top of cash rent levels, these rates are likely the biggest indicator of where the land market is headed. The only direction they can really go is up. So, what will happen when they start to climb?

Aupperle says that 4% believe prices in the ranges would not impact farmland prices; 29% believe prices in this range would have a modest, negative impact on farmland prices; 62% believe prices in the ranges would have a moderate, negative impact on prices; and 5% believe prices in this range would cause a farmland price decrease like that which occurred during the 1980s. "Respondents were asked an open-ended question on what factors would cause a large decrease in farmland prices. Responses included dramatic increase in rate of returns on alternative investment, significant reduction in farmer demand for farmland, reduction in willingness of farmers to bid aggressively for farmland, very low corn and soybean prices, corn price at $2.50 to $3.00 per bushel, CD rates between 4% and 5%, and interest rates over 12%."

The recent Illinois land market data only intensifies the attention on interest rates and cash rent levels in foreshadowing where the general market is going. The good news for those with a vested interest in the land market is that any value slide likely won't be too sharp if the data from Aupperle's survey is any indication, he says.

"This softening in prices has been expected for some time, and this is not a doom-and-gloom scenario. Land prices are still in ranges that have never been seen before, and mindful land owners and operators can still be profitable with the correct management programs in place. Some of survey respondents indicated a one-in-10 chance for large price declines over the next five years, but 31% expect that range to be only a negative 1% to 5% per year," Aupperle adds. "Farmland across Illinois is still among the most profitable anywhere in the country with the right management practices."

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